Don’t Get Shaken by Lack of Earthquake Coverage

When you think of earthquakes, you probably think of California, or maybe coastal areas of the Pacific Northwest. But 90 percent of the U.S. population lives in earthquake-prone areas. And a recent study by the U.S. Geological Survey found that 7 million people now face the risk of human-caused earthquakes.

By including human-induced events, our assessment of earthquake hazards has significantly increased in parts of the U.S.,” said Mark Petersen, chief of the USGS National Seismic Hazard Mapping Project. “This research also shows that much more of the nation faces a significant chance of having damaging earthquakes over the next year, whether natural or human-induced.”

Induced earthquakes are triggered by human activities, particularly the disposal of wastewater from oil and gas production. Wastewater can be disposed of by injecting it into deep underground wells, below aquifers that provide drinking water. Injecting fluid underground can induce earthquakes, a fact that was established decades ago by USGS scientists. This process increases the fluid pressure within fault zones, essentially loosening them and making them more likely to fail in an earthquake. When injected with fluids, even faults that have not moved in historical times can be made to slip and cause an earthquake if conditions underground are appropriate.

Six states face the most significant hazards from induced seismicity. In order from highest to lowest potential hazard, they are: Oklahoma, Kansas, Texas, Colorado, New Mexico and Arkansas. Oklahoma and Texas have the largest populations exposed to induced earthquakes.

Standard business property policies exclude coverage for “earth movement,” which includes earthquakes. You can add earthquake coverage to your insurance program in one of the following ways:

Standalone policies: Many insurers write commercial earthquake insurance policies. Most will cover buildings, business personal property, loss of business income, sprinkler leakage due to quake, and “ordinance or law coverage,” which protects you from increased costs of construction when you must bring existing structures up to current codes. You can find a list of insurance carriers admitted to do business in the state through the state insurance department, or simply contact us.

Policy endorsements: You can buy an endorsement to add coverage to an underlying commercial property policy. ISO form CP 10 40 will add earthquake and volcanic eruption to the causes of loss your commercial property policy covers. It also covers sprinkler leakage due to earthquake, but excludes coverage for fire, explosion (except for volcanic explosions), landslide, mudslide or mudflow, flood or tidal wave, even if caused by an earthquake or volcanic eruption.

As with your property policy, this endorsement has a coinsurance provision. This requires you to carry insurance on a specified percentage of the property’s value. Most policies have a coinsurance percentage of 80, 90 or 100 percent. If your insurance limits are less than the coinsurance amount when a loss occurs, the insurer will penalize you proportionately when it pays covered claims.

ISO form CP 10 45 covers the same causes of loss as the CP 10 40, but places a sub-
limit on coverage. This means it will cap claim payments for covered earthquake and volcanic eruption losses with a lower limit than other hazards covered by the policy, such as fire. Coverage under this type of endorsement usually costs less.

DIC policies: Some larger companies use DIC policies to insure earthquake exposures. DIC, or difference in conditions, policies are non-standard policies an underwriter can tailor to fill coverage gaps left by exclusions in other property policies. They generally exclude coverage for perils covered by standard property forms, such as fire, windstorm, hail, smoke, explosion, riot, civil commotion, vehicle and aircraft collision, vandalism and malicious mischief and sprinkler leakage. They also usually exclude damage from war and nuclear perils, which are considered too catastrophic to be underwritten.

DIC policies are usually written for a specific limit, such as $5 million or $10 million. Unlike most property policies, most DIC policies have no coinsurance provision, which means you do not have to purchase coverage for a specified percentage of the property’s full value.

Because DIC policies fill coverage gaps, your broker should coordinate your DIC policy with your other policies. Most DIC policies require the insured to keep the “underlying” property policies in effect for the entire term of the DIC policy.

We can help you evaluate your earthquake and volcanic eruption risks and recommend appropriate coverage. For more information, please contact us.